Game Plan – 3/27/09

The Elephant in the Room
Nice rally, but there is a small problem (click to enlarge):

Looking at this chart, it is easy to see why the market bottomed in October 2002: the economy had resumed growth. Growth; remember that?

The chart also shows how this recession makes the last one look like an itsy bitsy little blip. What are the chances that this bear market bottoms sooner than the last one? Zero!

Slop
The megaphone patterns on the IWM and QQQQ that I mentioned yesterday certainly didn’t turn out to be bearish. And neither did this one that popped up on the SPX 5-minute chart Thursday afternoon:

Nevertheless, these are chaotic patterns that don’t belong on any self-respecting rally chart. If the SPX had made a nice bullish ascending triangle pattern before it took out 826.84, I wouldn’t be critical. But this slop? Bah!

I think these megaphones are an indication that there isn’t a steady bid under the market, and a sign that the topping process has begun.

Vix Falling Wedge
The Vix has a bullish falling wedge pattern developing on its 60-minute chart:

That’s bullish for the Vix, and bearish for stocks. The last time I posted such a chart was on January 27th. The SPX made a top the next day. This pattern isn’t as perfectly formed as the last one, but it is another sign that we may be approaching a top.

R2K Drama
Here is a weekly chart of the Russell 2000:

Notice how the late October 2008 rally topped out at the 61.8% Fibonacci level (blue line and blue arrow.) Now the R2K is approaching the 78.6% level (red line and red arrow) which is at 454.24. So, the R2K may only be ten points away from an epic resistance level.

MacOS
It is very unusual for the McClellan Oscillator to get so overbought and stay that way for so many days. I wouldn’t be long here with Larry Kudlow’s money.

Support levels:
826.84 – (New) The top of the Gap of Doom, and prior resistance.
804.00 – This level has been weakened and can’t be counted upon.
797.00 – Still in play, but weakened also.
791.37 – Wednesday’s intra-day low.
780.00 – Was resistance before the plunge to 666.
768.54 – The Geithner Gap from Monday morning.
752.44 – November 20th low close.

Resistance levels above are:
839.43 – The final resistance level before the Gap of Doom on Feb 13.
851.00 – (New) Was resistance on Jan 26th and Feb 4th.
875.01 – The February 9th peak.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002 (September).
823.09 – A close above makes a monthly bullish engulfing candle.
826.84 – Gap of Doom. A weekly close below would be a red flag.
828.51 – 78.6% retracement from Feb 9th peak using closing prices.
830.45 – Ditto, but using the extreme high and low.

Holding above the 78.6% retracement level will convince many traders that a run to 875 is likely.

If you have any other important levels we should keep an eye on, please post them in the comments.

12 Responses to “Game Plan – 3/27/09”

  1. dblwyo says:

    Matt – thanks. Concise and convincing as always. On the economy sometimes it’s easier to look at YoY% changes to get the sense of the cycle:
    http://llinlithgow.com/bizzX/EconCharts/LTEcon/EconOut60-09Q1.jpg
    and then break it down to more granularity by looking at the higher-frequency monthly data over a shorter timeframe:
    http://llinlithgow.com/bizzX/EconCharts/EconH109/HFIndMar09.jpg
    If you want the words to wrap around that:
    http://llinlithgow.com/bizzX/2009/03/snapshot_in_time_economies_mar.html

    BtW – on FibFans appreciate the introduction and figured out a reasonable construction technique that’s probably not as good as tool but faster and less pain than hand-construction. Pick your low and high points and put a Fib on them. Then draw angled lines thru the Fib intersections of the exact date and voila’ …you get your fan. Seems to work fairly well. In case anybody else wants to try it.

  2. towelie says:

    Nice chart dblwyo…man, we called that puny thing in 2002 a “recession”? Thank you, Greenspan.

    AAPL is approaching resistance from February’s top at 111. If it bounces off hard, look out below. QQQQ is also very close to its February top.

    Anyone else seeing the rising wedge on SPY’s hourly chart? I could imagine a rally to 900 on some remarkable GDP data…but I don’t consider -6.3% remarkable. The major downtrend line from reaction high in November will intersect 85 on SPY on April 1st.

    A nice compact symmetrical triangle has formed on the C daily chart. Could break either way, but considering it is coming off of a major reaction low, I would lean to it going back down.

    The banks have not been in this rally for the past few days. Short interest has dropped significantly in them as well. Not much holding this whole rally up. Alas, it is an uptrend until we get a solid break down. Until then, I will continue to be patient.

  3. BobD says:

    1285 is obvious resistance on the NDX for tomorrow. This will be the third time to reach this price level this year.

  4. junglegirl says:

    Matt,

    Thanks, as always, for a thoughtful post. I’m still not in the P2 camp. I can come up with several valid alternative counts. At least from my point of view, the furthest along wrt EWT that fits with the economic situation would be for this rally to be part of intermediate wave 4, i.e. (4), of P1. This would leave us intermediate wave (5) down before P1 would bottom. That should take up at least the rest of this year, I would think, and likely put us into next year.

    towelie,

    Yes, I see the wedge. Watched it today. Didn’t make a play on it… yet.

  5. junglegirl says:

    In checking just now, I see that Tony C. has a new video out. Think I’ll watch it… here’s the link:

    http://www.youtube.com/watch?v=6rQLyXnkNpg&feature=channel

  6. K says:

    http://www.chartingstocks.net/2009/03/stocks-will-drop-banks-will-go-belly-up-roubini/

    anyone seen that?

    The stock market will drop as major banks go belly up says Nouriel Roubini, the NYU economist that successfully predicted the current economic collapse. Below is the text from an interview Mr. Roubini gave  today on Bloomberg TV.

  7. dblwyo says:

    towlie – that yoy thing is really useful ain’t it ? makes the patterns as clear as a trout leaping for a fly in a clear lake :) and puny is the word…. the data hasn’t been this bad since before WW2 AND….underline AND look at the cycle…we’re early days yet unless you believe we’re going to see the sharpest V up in history. tell me that’s priced in !

  8. Yerk says:

    Matt, to follow your call for lines

    858 (phil mentioned it yesterday, too) is the upper channel line connecting the major highs nov-jan and lows dec-mar

    ~850 and ~875 are major support/resistance areas going all the way back till oct 13.

  9. Yerk says:

    This one is interesting …
    http://www.financialsense.com/fsu/editorials/willie/2009/0326.html
    Search for “This message was just received ” and read the next two paragraphs.

    Where this sentiment will actually lead to is speculation but it for sure does not feel like things are on a sound footing.

  10. BobD says:

    Technical speculators game plan is for a low in mid-April now that the Dow has hit resistance near 8000.

    http://tinyurl.com/cssucw

  11. Phil2 says:

    my EW take,
    I have a fibbo target on this impulse up from 666 at 864-869. but if 5 is a diagonal as it looks, probably only gets to downtrend line around 850. Quarter end is next Tuesday so the funds should be pushing hard until then.

  12. Sherry says:

    Yerk-
    As always…a great link. I read an article
    which said that the IMF would establish
    the new world reserve currency.
    Everything points to big trouble ahead.
    And I think the USD has started at
    least a 3 year decline.